JUDGE JONES UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, v. DENNIS K. McNELL, Defendants. COMPLAINT The Securities and Exchange Commission (the "SEC" or "Cornmission") alleges as follows: NATURE OF THE ACTION 1. This case arises from the fraudulent conduct of Dennis K. McNell ("McNell") while he was the Chief Executive Officer ("CEO"), Chief Operating Officer ("COO"), and a registered representative of Redwood Trading, LLC ("Redwood"), a now defunct broker-dealer. During the period of October 2003 through September 2004, McNell (i) aided and abetted his customer's fraudulent trading scheme involving the execution of thousands of short sales of securities listed on the New York Stock Exchange ("NYSE") with the intent to artificially depress the price of those shares, and (ii) engaged in a scheme to conceal substantial trading losses that McNell had incurred in a Redwood proprietary trading account during July and August 2004. The trading scheme that was orchestrated by McNell's customer, and aided and abetted by McNell, yielded approximately $2,400,000 in illicit gains in less than a year. McNell's scheme to
17
Embed
Complaint: Dennis K. McNell - SEC · judge jones united states district court for the southern district of new york securities and exchange commission, v. dennis k. mcnell, defendants.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
JUDGE JONES
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION,
v.
DENNIS K. McNELL,
Defendants.
COMPLAINT
The Securities and Exchange Commission (the "SEC" or "Cornmission") alleges as follows:
NATURE OF THE ACTION
1. This case arises from the fraudulent conduct of Dennis K. McNell
("McNell") while he was the Chief Executive Officer ("CEO"), Chief Operating Officer
("COO"), and a registered representative of Redwood Trading, LLC ("Redwood"), a now
defunct broker-dealer. During the period of October 2003 through September 2004,
McNell (i) aided and abetted his customer's fraudulent trading scheme involving the
execution of thousands of short sales of securities listed on the New York Stock
Exchange ("NYSE") with the intent to artificially depress the price of those shares, and
(ii) engaged in a scheme to conceal substantial trading losses that McNell had incurred in
a Redwood proprietary trading account during July and August 2004. The trading
scheme that was orchestrated by McNell's customer, and aided and abetted by McNell,
yielded approximately $2,400,000 in illicit gains in less than a year. McNell's scheme to
hide trading losses, caused losses to Redwood of approximately $140,000, which, in turn,
caused Redwood to engage in business while undercapitalized.
2. Between October 2003 and September 2004, a Redwood customer carried
out a manipulative scheme through several Redwood accounts by repeatedly executing
short sales of numerous securities listed on the NYSE with the intent to artificially
depress the price of those shares. In furtherance of the scheme, the Redwood customer
routinely executed short sales while the price of the security was declining, in violation of
SEC Rule 10a- 1, which was in effect at that time. The Redwood customer also failed to
mark thousands of his orders to sell securities as short sales in order to create the false
appearance that the orders were long sales.
3. As the broker for the Redwood customer's accounts, McNell aided and
abetted these violations by (i) disabling the fknction of Redwood's trading software that
was programmed to prevent illegal short selling, and (ii) allowing the Redwood customer
to engage in the illegal conduct for almost a year. As a result, when the Redwood
customer entered his illegal short sale orders, the Redwood trading software did not block
the orders, as it was designed to do, and instead, submitted them for execution on the
NYSE, where they were routinely executed in violation of SEC Rule 10a-1, which was in
effect at that time.
4. During July and August 2004, McNell also fraudulently concealed his
substantial trading losses from Redwood's chief compliance officer ("Compliance
Officer"). Specifically, McNell surreptitiously caused over ninety unprofitable trades,
resulting in approximately $140,000 of losses, to be transferred into Redwood's error
account fiom a day trading account over which McNell had exclusive control and trading
authority.
5. By incurring these substantial losses, and then concealing them from
Redwood's Compliance Officer, McNell also caused Redwood to violate its net capital
requirements.
6. By engaging in this conduct, McNell violated Section lO(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule lob-5 thereunder, and
aided and abetted violations of Sections 9(a)(2), 10(a)(l), lo@), 15(c)(3) and 17(a)(l) of
the Exchange Act [15 U.S.C. 9s 78i(a)(2), 78j(a)(l), 78j@), 78o(c)(3), and 78q(a)(l)],
Redwood was obligated to promptly furnish to the SEC staff, upon the staffs request,
copies of those records that it was required to preserve under Section 17(a)(l) of the
Exchange Act, but failed to do so.
41. McNell, in his capacity as the custodian of.Redwood's books and records,
was required to promptly produce the requested documents to the SEC staff, but he
repeatedly failed to do so.
FIRST CLAIM FOR RELIEF
McNell Aided and Abetted Beardsley's Violations of Sections 9(a)(2), 10(a)(l), and 10(b) of the Exchange Act [I5 U.S.C. §tj 78i(a)(2), 78j(a)(l), and 78j(b)], and
Exchange Act Rule lob-5 [17 C.F.R. tj 240.10b-51, and former Exchange Act Rule 10a-1 [17 C.F.R. tj 240.10a-11
42. Paragraphs 1 through 41 are re-alleged and incorporated herein by
reference.
43. Section 20(e) of the Exchange Act [15 U.S.C. 9 78t(e)] provides that any
person who knowingly provides substantial assistance to another person in violation of a
provision of the Exchange Act, or any rule or regulation issued under the Exchange Act,
shall be deemed to be in violation of such provision to the same extent as the person to
whom such assistance is provided.
44. By engaging in the above-conduct in the Beardsley accounts, Beardsley,
directly or indirectly, knowingly or recklessly, by use of the means or instrumentalities of
interstate commerce or of the mails, or of the facilities of a national securities exchange,
in connection with the purchase or sale of a security: (a) employed a device, scheme, or
artifice to defi-aud; (b) made untrue statements of a material fact or omitted to state a
material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; or (c) engaged in acts,
practices, or courses.of business which operated as a fiaud or deceit upon other persons,
in violation of SectionlO(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule lob-5
thereunder [ I 7C.F.R. 5 240.1 Ob-51.
45. By engaging in the above-conduct in the Beardsley accounts, Beardsley
directly or indirectly effected, alone or with one or more other persons, a series of
transactions in securities registered on a national securities exchange, creating actual or
apparent active trading in such securities, or raising or depressing the price of such
securities, for the purpose of inducing the purchase or sale of such securities by others, in
violation of Section 9(a)(2) [15 U.S.C. fj 78i(a)(2)].
46. At the time of the alleged conduct, Section 10(a)(l) of the Exchange Act
and Rule 10a-1 thereunder provided that, subject to narrow exemptions, a listed security
could not be sold short (i) at a price below the immediately preceding sale price for that
security, or (ii) at a price which is the same as the immediately preceding sale price for
that security, but which is less than the most immediate different preceding sale price.
None of the exemptions that were provided for under the rule were applicable to the short
selling executed in the Beardsley accounts during the relevant period, as alleged herein.
By engaging in the above-conduct in the Beardsley accounts, Beardsley violated Section
lO(a)(l) [15 U.S.C. fj 78j(a)(l)] and former Exchange Act Rule 10a-1 [17 C.F.R. fj
240.1Oa-11.
47. By his conduct, described above, McNell knowingly provided substantial
assistance to Beardsley's violations of Sections 9(a)(2), 10(a)(l), and 10(b) of the
Exchange Act [15 U.S.C. $8 78i(a)(2), 78j(a)(l), and 78j(b) 1, and Exchange Act Rule
lob-5 [17 C.F.R. $240.10b-51, and former Exchange Act Rule 10a-1 [I 7 C.F.R. 5
240.10a-11.
48. By engaging in the foregoing conduct, McNdl aided ind abetted
violations of Sections 9(a)(2) 115 U.S.C 5 78i(a)(2)], 10(a)(1) [15 U.S.C. tj 78j(a)(l)] and
10(b) of the Exchange Act [15 U.S.C. 5 78j(b)], and Exchange Act Rule lob-5 [17 C.F.R.
5240.10b-51, and former Exchange Act Rule 10a-1 [17 C.F.R. $240.10a-11.
SECOND CLAIM FOR RELIEF
McNell Violated Section 10(b) of the Exchange Act [15 U.S.C. tj 78j(b)], and Exchange Act Rule lob-5 [17 C.F.R. tj 240.10b-51
49. Paragraphs 1 through 48 are re-alleged and incorporated herein by
reference.
50. By reason of the foregoing conduct relating to McNell's concealment of
his trading losses from Redwood, McNell directly or indirectly, knowingly or recklessly,
by use of the means or instrumentalities of interstate commerce or of the mails, or of the
facilities of a national securities exchange, in connection with the purchase or sale of a
security: (a) employed a device, scheme or artifice to defraud; (b) made untrue statements
of a material fact or omitted to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not
misleading; or (c) engaged in acts, practices, or courses of business which operated as a
fraud or deceit upon other persons.
5 1. By engaging in the foregoing conduct, defendant McNell violated Section
10(b) of the Exchange Act [15 U.S.C. 5 78j(b)] and Rule lob-5 thereunder [17 C.F.R. tj
240.1 Ob-51.
THIRD CLAIM FOR RELIEF
McNell Aided and Abetted Redwood's Violations of Section-X5()@) of the Exchange Act [I5 U.S.C. 5 78o(c)(3)], and
Exchange Act Rule 15~3-1 117 C.F.R 5 240.15h-I] ,
52. Paragraphs 1 through 5 1 are re-alleged and incorporated by reference.
53. Section 20(e) of the Exchange Act [15, U.S.C. $78t(e)] provides that any
person who knowingly provides substantial assistance to another person in violation of a
provision of the Exchange Act, or any rule or regulation issued under the Exchange Act,
shall be deemed to be in violation of such provision to the same extent as the person to
whom such assistance is provided.
54. Section 15(c)(3) of the Exchange Act [15 U.S.C. 9 78o(c)(3)] makes it
unlawful for a broker or dealer to engage in any securities business while not in
compliance with the net capital rule, Exchange Act Rule 15c3- 1 [17 C.F.R. 240.15~3-
11-
55. As described above, McNell knowingly provided substantial assistance to
Redwood's violations of Section 15(c)(3) of the Exchange Act and Rule 15~3-1
thereunder, by among other things, causing Redwood to engage in securities business
while it was in violation of the net capital rule.
56. By engaging in the foregoing conduct, McNell aided and abetted
Redwood's violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-I
thereunder.
FOURTH CLAIM FOR RELIEF
McNell Aided and Abetted of Redwood's Violations of Section 17(a)(l) of the Exchange Act [15 U.S.C. tj 78q(a)(l)], and
Exchange Act Rules 17a-3 and 17a-40') [17 C.F.R. $5 240.17a-3 and 240.17a-4Q)j
57. Paragraphs 1 through 56 are re-alleged and incorporated by reference.
58. Section 20(e) of the Exchange Act [15 U.S.C. 5 78t(e)] provides that any
person who knowingly provides substantial assistance to another person in violation of a
provision of :the Exch'ange Act, or any rule or regulation issued under the Exchange Act,
shall be deemed to be in violation of such provision to the same extent as the person to
whom such assistance is provided.
59. Section 17(a)(l) El5 U.S.C. 9 78q(a)(l)] of the Exchange Act and Rule
17a-3 [17 C.F.R. 9 240.17a-31 thereunder require that registered brokers and dealers
make and keep current certain specified books and records relating to their business.
Such books and records must be accurate.
60. Among the records that brokers and dealers are required to make and keep
are: (i) blotters (or other records of original entry) containing an itemized daily record of
all purchases and sales of securities [Rule 17a-3(a)(l)]; and (ii) "[a] memorandum of
each purchase and sale for the account of the member, broker, or dealer showing the price
and, to the extent feasible, the time of execution" [Rule 17a-3(a)(7)]. Among other
things, McNel17s scheme to conceal his trading losses caused Redwood to (i) not create
order tickets for his trading in the McNell proprietary account, and (ii) create inaccurate
trade blotters for the trading in the McNell proprietary account.
6 1. Rule 17a-4(j) of the Exchange Act provides that: "Every member, broker
and dealer subject to this section shall furnish promptly to a representative of the
Commission legible, true, complete, and current copies of those records . . . that are
required to be preserved under this section, or any other records . . . subject to
examination under section 17@) of the Exchange Act [ 15 U.S.C. 78q@)] that are
requested by the representative of the Commission." As alleged above, McNell caused
Redwood to not produce documents that were requested by the SEC staff.
62. As described above, McNell knowingly provided substantial assistance to
Redwood's violations of Section 17(a)(l) and Rules 17a-3 and 17a-40) thereunder.
63. By engaging in the foregoing conduct, McNell aided and abetted
Redwood's violations of Section 17(a)(l) and Rules 17a-3 and 17a-4(j) thereunder.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court enter a
judgment:
(a) permanently enjoining McNell from violating Sections 9(a)(2), 1 O(a)(l),
10(b) of the Exchange Act and Rule lob-5 thereunder;
(b) permanently enjoining McNell from aiding and abetting violations of
Sections 15(c)(3) and 17(a)(l) of the Exchange Act and Rules 15~3- 1, 17a-3 and 17a-46)
thereunder;
(c) ordering defendant McNell to pay a civil penalty pursuant to Section
21(d)(3) of the Exchange Act [15 U.S.C. 5 78u(d)(3)]; and
(d) providing such other relief as may be appropriate.
Dated: ' 1, f (08
Mark A. Adler (MA 8703) Jane M.E. Peterson (Trial Attorney) Antonia Chion Yuri B. Zelinsky Michael A. Ungar Kelly J. Rock Attorneys for Plaintiff Secuities and Exchange Commission Mail Stop 40 1 0 100 F Street, N.E. Washington, DC 20549